The Ultimate Guide to Evergreen Payments for Law Firms

A postmortem analysis by CB Insights listed “ran out of
cash” as the second most common reason for business failure. While
it’s typically a problem for startups and new firms, it’s also a problem for
established law firms.

I’m talking about feast or famine.

One minute your firm is awash with clients and projects.
You’re scrambling to keep up with the demand, to serve your clients well. The
next minute it feels like your firm is starving. It’s stressful and difficult
to grow your firm under these conditions.

There is one major cause that’s often ignored.

Financial highs and lows = a
lack of structure?

I’m not talking about the financial highs and lows that come
with attracting or losing a major client. I’m also not talking about the
one-off events that occur when your firm is in transition or your financial
situation is undergoing a major change.

I’m talking about firms that are constantly in flux.

When I use the term “in flux” I’m talking about a specific set of financial circumstances that plague law
firms.

A decreased ability to consistently attract new
clients

Clients who frequently forget to pay their bills on time (or at all)

A decreased ability to attract additional work
or referrals from “promoter”
clients

A payment structure or building model that
rewards bad behavior (e.g. discounts or write-downs if
clients pay your invoice early or on time)

Lost income due to a missed billing cycle (e.g.
forgot to send your invoice to clients)

There are several details that immediately spring to mind.
Poor timekeeping, unclear billing policies and procedures, a failure to send
out invoices, etc. A lack of financial
structure contributes to these firm killing problems.

Evergreen payments: the key
to healthy cash flow

Definitions are important so let’s begin with the basics. When
I use the word cash flow this is what I’m talking about.

I’m going to assume you already know this. My goal here
isn’t to insult your intelligence but to ensure that we’re all singing from the
same song sheet.

Cash inflow good,
cash flow crunch bad.

This is precisely why you need evergreen payments. Evergreen
payments simplifies the cash flow management process (a bit) for law firms. If
you have a system that maintains good
cash inflows (e.g. consistent, reliable and growing) your job is really
only focused on one specific area.

Maintaining/decreasing expenses.

Evergreen/recurring payments make this possible for a few
important reasons. When used appropriately, this makes feast and famine cycles
a thing of the past. Let’s review the obvious and commonly cited reasons.

More predictable cash flow. You and
your clients settle into a routine. You bill at a specific time each month,
often with a predetermined budget or range. Clients pay you automatically at a
set time each month. You’re able to replenish your evergreen retainer or
receive your next payment (recurring payments) at set intervals with little to
no resistance from your clients, even if
you’re unaware of the total cost. This decreases the likelihood that your
firm will lose money.

Decreased collections activity. If
you’re a business-to-consumer or small business attorney, Evergreen/recurring
payment plans are a must. Why? Because according
to economist Robert Reich, 8 out of
10 people live paycheck to paycheck. Research from the NFCC found 25
percent of consumers don’t pay their bills on time. This is a problem for
firms – payment upfront (via retainer) is the
golden rule. At some point in the near future, a large portion of your
client base will stop paying. An evergreen/recurring payment plan reduces collections
activity, increasing firm cash flow.

Value-driven
client relationships. A financial routine shifts everyone’s attention to
the value and outcomes received by the client. A recurring payment plan reduces
the attention placed on the bills and payment. Yes, clients will still be
focused on their bill which, as you’ll soon see, is important for consumption.
A recurring bill means their balance will be broken up into small, bite-sized
pieces clients can manage.

Law firms become scalable. A payment
plan gives your firm a certain amount of predictability. This is crucial for firm growth. The more predictable your
receivables, the easier it is for your firm to raise capital (in the form of
loans or equity), attract partners and grow your firm.

You’re probably already familiar with these benefits. Even
if you aren’t, it’s not all that hard
to figure out, am I right? Here’s the thing about these benefits. They’re
obvious but they’re not the most valuable part of a recurring payment plan.

Okay then, what is?

As I mentioned previously, the most important components
sidestep money altogether. Let’s review a few of the wildly profitable but
hidden benefits of evergreen/recurring payments.

Hidden benefit #1: Clients
are trained properly

The attorney/client relationship bears a striking
resemblance to a parent/child relationship. Your clients are in a vulnerable position. They’re trusting you
to advocate for and champion their interests. Evergreen/recurring payment plans
train your clients to behave appropriately. It maximizes your client’s focus on
value and minimizes their focus on price (which you don’t want to eliminate).

You can do this in several ways:

Offer clients a set price or billing structure
that’s easy to follow (good)

Provide clients with a recurring payment
schedule for their matter (better)

You provide your clients with statements verifying the
amounts they’ve already paid. Notice, you’re not asking for permission, you’re
providing a summary or accounting for a
decision already made.

This is the key distinction.

This requires that you work to build more trust upfront
during your intake process but it’s well worth it as you’ll see with the next
benefit.

What if you don’t? What if you ignore client payment delays?

Allow clients to pay late without penalty and
they’re likely to do it again (and again)

You (severely) diminish client loyalty (if they won’t stand up for themselves
there’s no way they’ll stand up for me…)

You’ll experience a cash flow crunch as feast
and famine cycles become the norm

You won’t be able to train your clients properly until you
know why they’ve stopped paying. Here are a few of the most common reasons for
nonpayment.

A cash flow crunch of their own: Clients with financial problems are understandably hesitant to pay. These
clients fully intend to pay you but they lack the financial resources to do so.
Being paid is important, maintaining their habit is more important. You want to
ensure your clients send you something each and every month. This may require
that you provide them with less until they’re fully caught up. It may also
require modifying representation. What’s most important? Treating your clients
as allies, never as an adversary.

Unhappy or dissatisfied clients: Your
client realizes their case/matter won’t be resolved in their favor so they
decide to stop paying you. It makes sense in their head. Why would they
continue to pay you if they’re going to lose and be forced to pay the other side? An evergreen/recurring payment
plan helps to circumvent this issue. It positions you and your client on the
same team. Remember, clients, are more likely to use what they pay for. The
more they consume the more they buy. The more they buy the more they trust.
You’ll be able to earn more fees from evergreen clients who are focused on
value rather than cost.

Large corporations: Large corporations
have their own set of billing
guidelines, payment schedules and hidden requirements that need to be
followed to the letter. Fail to do so and you may trigger a billing dispute
delaying payment. If you’re dealing with unexpected news pick up the phone and
call your client. Create a map of expectations ahead of time. You’ll want to
outline the explicit and implicit expectations you’re dealing with.

Clients who are unwilling to pay: These
clients weasel their way into your firm with one goal in mind. To extract as much
free/low-cost work as they can from you before they’re given the boot. These
clients wreak havoc on firms as they make their exit. They leave negative
reviews, burn bridges and destroy firm morale. It’s best to avoid these clients before they find a way into your
firm. Ask for a larger upfront retainer (followed by regular and evergreen
retainers or recurring payments).

Hidden benefit #2: Client
loyalty + revenue goes up

Which client is more likely to stay? Richard a client who pays a $17,000 retainer or Geoffrey who
pays $2,450 per mo ($29,400 annually)? Give up?

It’s Geoffrey.

Richard will feel a burning desire to get his money’s worth
but the pain of his initial purchase (e.g. the potential for loss) will
decrease with time. Geoffrey, on the other hand, will feel the need to get his
money’s worth each and every month. He’ll ask you for more help, which will
increase loyalty over time. Why?

“The extent to which customers
use the products they’ve paid for determines whether they will repeat the
purchase.” John
T. Gourville

The more your clients consume – the more engaged they are,
the more questions they ask, the more assistance they require – the more likely
they are to continue working with your firm. Here’s the interesting part of
this research.

Cost drives
consumption.

Do you want clients to spend more with your firm over time?
To request your help with additional matters? To be more receptive and open to
your suggestions – even if there’s a significant financial upside for you?

The sunk cost effect is the core driver of this
predictability. Your clients feel compelled to use the services they’ve paid
for to avoid feeling that they wasted their resources.

See for yourself.

Wait just a minute here!

Am I advocating that you use evergreen/recurring payments to manipulate clients, via the sunk cost
effect, to keep them trapped in a relationship with you?

Absolutely not.

I’m stating something much worse.

I’m stating that your clients will use, rely on and
manipulate the sunk cost effect themselves and that there’s not a
thing you can do to stop them from doing so. Once they’re invested
(financially) in your firm, and you’ve earned their buy-in with
evergreen/recurring payments they’ll do it themselves.

Be careful.

The sunk cost bias increases
in strength over time. The longer the relationship, the more money spent,
the more your clients consume, the more reliant clients are on you – the more
likely they are to continue paying
for your help.

It’s your job to ensure your clients are treated well.

Hidden benefit #3:
Circumvent client games

You know the one.

Your client feels their case/matter won’t be resolved in
their favor so they decide to stop paying. Again, it makes sense in their head
– why pay you and the other side if
they’re going to lose? A recurring payment plan circumvents this issue.

Clients spend less money upfront but pay regularly for your help

If they fail to pay their recurring payment plan
they could lose your support at an inconvenient, catastrophic or unpredictable
moment. A recurring payment plan can also circumvent piecemeal billing,
providing firms the structure and predictability they need to retain quality clients.

Evergreen/recurring payment plans take advantage
of the sunk cost bias. It’s a tendency people have to irrationally follow
through on an activity that fails to meet their expectations due to the amount
of time and/or money invested.

Hidden benefit #4: You
(semi) productize your firm’s services

Productization requires specialization. If you’re a
multi-purpose firm a recurring payment plan can work but it will also require a
lot more work. Specialization with a few practice areas is key. If you focus
exclusively on family, tax or intellectual property law you can productize your
services using recurring payment plans as a delivery framework.

The foot-in-the-door-offer. Irresistible introductory offers that are designed to attract client attention
in hopes of securing an ongoing relationship with higher fees. This productized
service is an excellent strategy to attract a consistent stream of B2B clients.

One-time purchases. These purchases
fulfill a client need but they also set the relationship up for upsells, cross-sells
and down-sells. You’re not pitching clients irrelevant services they don’t want
or need. You are piggybacking on your one-time offer, showing clients that an
ongoing relationship would provide them with more value.

Recurring retainers/subscriptions. Clients pay you for a value-added service on a weekly, monthly, quarterly or
annual basis. This doesn’t have to be labor intensive work either. You can use
evergreen retainers and subscription payments as a strategy to handle the
tedious or routine work clients need done on a day-to-day basis.

Here’s a brief idea showing you how you can use a productized
service to grow your firm.

Step #1: Set up your DBAs

You’ll want to verify that this is acceptable in your local
jurisdiction. You’ll also want to notify your malpractice carrier of any
pertinent changes. You can use your DBAs for a variety of purposes.

Creating
a low-cost brand that automates or semi-automates routine legal work (e.g.
wills, basic trusts, agreements, etc.). This low-cost brand would be a helpful
and cost-effective way to rapidly train new graduates/associates. It could also
be a significant profit center for your firm.

Creating
a prestige brand that bills at a higher rate. This is perfect if your
prestige brand only matches illustrious/valuable
clients with law firm partners who have 20+ years of experience under their
belt. It’s an ideal strategy if you’re looking to win larger contracts from well-paying
corporate clients.

Creating
a volume brand that produces large amounts of high-quality work at
reasonable, mid-market rates. This would be perfect for grinder associates were focused on churning out as much high-quality work as possible.
It would also be ideal for the minders who manage them.

Creating
a specialist brand that focuses on specific practice areas or precise areas
that require a tremendous amount of legal expertise. This is perfect if you’d
like your firm to branch off into specialized practice areas (e.g. IP, tax or
compliance law).

This quick bullet list isn’t comprehensive. It’s not
intended to be. It’s designed to get you thinking about the ways you can use sperate
brand identities (via DBAs) to create consistent and steady cash flow for your
firm. It would require that you maintain a separate brand identity for each DBA
(e.g. business cards, websites, social media, mailing addresses, etc.).

Why go to all this
trouble?

Your brand stands for one specific thing in a customer’s mind. If we’re relying on the Pareto
distribution, I know most attorneys
receive 80 percent of their revenue from 20 percent of their practice areas.

Separate brand identities provide stability.

Practice areas that are viable today may
not be as viable tomorrow. Properly used, brand identities via DBAs provide
firms with the flexibility and financial stability they need to weather any
economic storm.

Step #2: Create and
set up payment terms

You’ll want to create the payment terms necessary for your
firm whether you’re using DBAs or not. You’ll want to make sure evergreen
retainers are stored appropriately in your trust account until their earned
(obviously). It’s something you already know but it’s still surprising that so
many attorneys miss this.

You can use evergreen retainers, recurring and subscription
billing, fixed fees and other alternative
fee arrangements, where appropriate, in your DBAs.

Again obvious, but worth repeating.

Next, you’ll want to avoid one of the biggest mistakes solo
attorneys make when discussing fees with a prospective client.

Assuming your client understands.

You want to lay out the terms of your evergreen retainer
clearly, so your clients understand it, ahead of time. You’ll want to verify (without
being condescending) that your clients understand.

They should know:

When evergreen retainers will be replenished
(e.g. triggered by schedule or dollar amounts)

What happens if they fail to pay for/replenish
their retainer (e.g. work stops, withdraw representation)

The late fees and penalties associated with
their failure/inability to pay

That you’ve made a good-faith effort to suss out
any questions, objections, fears or concerns upfront

What their options are if they object to any of
the terms you laid out

What happens if clients reject the terms you laid out?

It’s simple.

You refer them to a DBA that will better serve their needs.
If a low-cost client wanders into your prestige brand looking for help they may
balk at the price. No worries, simply redirect them to your low-cost DBA.

Step #3: Get existing
clients to switch

When it comes to switching there’s a hidden fear.

“Clients don’t
want to switch. If I push too hard to leave or I’ll lose their business.”

Customers in a constrained relationship feel they
have to stay to avoid losing the exclusive benefits there are currently
receiving. They may also choose to stay to avoid the transitional pain and
expense that comes with switching.

Here the main factors that impact your client’s
psychological commitment to your firm.

Sunk cost
effect. Remember this? The more recent the spend, the more likely customers
are to stay and consume. The more money they invest the more likely they are to
stay. The more they consume now, the more they’ll consume in the future.

Regret
avoidance and loss aversion.It’s
better to not lose $ than to gain $. When customers are satisfied, they tend to avoid doing things they feel they
may regret; they stick with what they know and stay with the status quo to
limit risk. The stronger your value proposition the greater the loss aversion.

A desire
to feel in control. Customers typically don’t have control over the
outcome. As a result, they prefer to maintain control over their circumstance.
Doing this helps them avoid the psychological pain that comes with uncertainty.
Customers stay with the status quo to avoid losing control.

What
about dedicated relationships? These customer relationships last longer because
they’re self-sustaining. These clients develop emotional bonds with the
associates/team handling their matter/project. It’s no surprise then that
loyalty flows naturally from these client relationships. Which factors are most
important to these relationships?

Benevolence. Your clients feel a consistent sense of goodwill from you. The relationship
isn’t adversarial it’s a healthy mix of partnership and caretaking.

Competence. You’re the best-of-breed, the finest your client can afford. You’re highly
competent, you’re able to produce results other attorneys can’t or struggle to
achieve.

This is how you get existing clients to switch to evergreen
payments. You have a constrained, dedicated or combination (both) relationship
with your clients.

Anything else is voluntary.

Want to increase the likelihood that your clients make the
switch to evergreen or recurring payments? Give them a compelling reason.

Create a
compelling value proposition. Create a service/firm with an exclusive,
compelling, credible and clear offer from
your client’s perspective.

Reverse
or assume their risk. Find a way to eliminate, reduce or modify the risk to
your clients. The risk to your client switching comes in two flavors (1.) the obvious risks (e.g. loss
money, receive less attention) and (2.) the hidden risks (e.g. you’re overcharging me, this deal is predatory, etc.)

Give them
an out. Give your clients the opportunity (as much as possible) to say No.
Provide them with a clear exit if they’re unwilling to continue with the
current arrangement. Examples include upgrades, downgrades, renegotiation, and
alternate DBAs.

This is how you get clients to switch.

The good news? It’s upfront work that pays dividends
indefinitely. The bad news? It’s difficult, requires a fair bit of thinking and
in the end, most firms give up before they’ve completed the process.

This is how you win.

Step #4: Manage your
financial data

It’s a mistake to attempt to manage your financial data
manually. There’s too much data to manage and not enough time to analyze it.
With practice management software, you can manage evergreen payments on a
recurring basis. You can set up alternative fee arrangements (e.g.
subscriptions, fixed fee, contingency, holdbacks, etc.).

There’s something more important here.

It’s the data.

If you’re looking to get a decisive victory with your cash
flow management you’ll need a significant amount of data. You’ll need a way to
track these
metrics comfortably. The easier it is, the easier it will be to grow your
firm.

Verify that your software can do the following:

Set up alerts: These alerts are
automatic, alerting you to any potentially dangerous or problematic issues
before they hit the point of no return.

Schedule software: If you’re
relying on practice management software, you’ll want to schedule reports so
they’re run automatically, on a schedule, all the time. Get everything out of
your head and into a trusted software system.

Schedule people: Build a team of
trusted, freelance/outsourced providers who can help you with the above list of
metrics. If you’re doing amazing work (and I assume that you are), you won’t
have the time you need to track all of this consistently. Surround
yourself with software and people who can.

Focus on accuracy: You’ll want to
provide your people and software with the information and resources they need
to perform. This means you’ll need to track your time accurately, record data
in your software tools judiciously and focus on doing this consistently.
Skip this step and your metrics won’t be accurate.

If you’re using practice management software you should be
able to set evergreen and recurring payments up easily. You’ll want to ensure
that you receive notifications or alerts when you retainer balance is low. Your
practice management tool should also manage your trust accounts.

Financial highs and lows
signal a lack of structure

New and established firms struggle with feast or famine
cycles.

One minute your firm is awash with clients and projects.
You’re scrambling to keep up with the demand, to serve your clients well. The
next minute it feels like your firm is starving. It’s stressful and difficult
to grow your firm under these conditions.

This doesn’t have to be you.

Most of these law firms exist in a constant state of flux. They struggle to receive payment
from their clients. Their day-to-day cycle is a consistent source of stress and
anxiety. Evergreen payments are the key to healthy cash flow.